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World

China’s factory, retail sectors skid as COVID hits growth

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  • China’s industrial output growth slows more than expected
  • Retail sales contraction deepens
  • Property investment falls most in over two decades
  • Nationwide jobless rate climbs
  • Near-term outlook darkens following COVID relaxation – analysts

BEIJING, Dec 15 (Reuters) – China’s economy lost more steam in November as factory output slowed and retail sales extended declines, both missing forecasts and clocking their worst readings in six months, hobbled by surging COVID-19 cases and widespread virus curbs.

The data suggested a further deterioration in economic conditions as lockdowns in many cities, a property-sector crunch and weakening global demand pointed to a bumpy road ahead even as Beijing ditched some of the world’s toughest anti-virus restrictions following widespread and rare public protests.

Industrial output rose 2.2% in November from a year earlier, missing expectations for a 3.6% gain in a Reuters poll and slowing significantly from the 5.0% growth seen in October, the National Bureau of Statistics (NBS) data showed on Thursday. It marked the slowest growth since May, partly due to disruptions in key manufacturing hubs Guangzhou and Zhengzhou.

Retail sales fell 5.9% amid broad-based weakness in the services sector, also the biggest contraction since May. Analysts had expected the gauge of consumption to shrink 3.7%, accelerating from a 0.5% dip in October.

In particular, sales in the contact-intensive catering sector fell 8.4% from a year earlier, accelerating from the 8.1% decline in October.

Meanwhile, automobile production slumped 9.9%, swinging from an 8.6% gain in October.

China’s yuan eased against the dollar on Thursday, as the data hit investor confidence.

“The weak activity data suggest that the policy needs to be eased further to revive the growth momentum,” said Hao Zhou, chief economist at GTJAI. “The increased size of the MLF rollover this morning is in line with the overall easing policy tones. Looking ahead, we also forecast that the rates for MLF will be lowered by 10bps next Q1.”

China’s central bank ramped up cash injections into the banking system on Thursday and held interest rates on the medium-term policy loans, or MLF, to keep liquidity conditions ample.

Reuters Graphics Reuters Graphics

The world’s second-largest economy has been depressed by its zero-COVID policy, as tight movement controls hampered consumption and production. Other headwinds the country faces are its property slump, global recession risks and geopolitical uncertainties.

Property investment fell 19.9% year-on-year, the fastest pace since the statistics bureau began compiling data in 2000, according to Reuters calculations based on data from the NBS.

Policymakers have rolled out support for the sector on almost all fronts, including credit lines from banks, bond financing and equity financing, but analysts said such effects have yet to be seen as home sales still remained weak.

Fixed asset investment expanded 5.3% in the first 11 months of the year, versus expectations for a 5.6% rise and growth of 5.8% in January-October.

Hiring remained low among companies wary about their finances. The nationwide jobless rate rose to 5.7% in November from 5.5% in October. Youth unemployment dipped to 17.1% from 17.9% in October.

“December data might be even worse – that’s not because everything is getting worse in China, because the end of the tunnel is coming,” said Alicia Garcia-Herrero, chief economist of Asia-Pacific at Natixis.

“I am expecting a big collapse in industrial production in December. This will be the immediate consequence of the opening up,” she said, downgrading GDP growth in the fourth quarter to 2.8% from 3% previously.

China has set out plans to expand domestic consumption and investment, state media said on Wednesday, as policymakers face multiple challenges following abrupt relaxations of harsh COVID-related restrictions, which are expected to usher in a surge of infections.

That would hit businesses and consumers, while a weakening global economy hurts Chinese exports.

China’s economy grew just 3% in the first three quarters of this year and is expected to stay around that rate for the full year, well below the official target of “around 5.5%”.

All eyes are on the closed-door annual Central Economic Work Conference, when Chinese leaders gather to set next year’s economic agenda. They will likely map out more stimulus steps, eager to underpin growth and ease disruptions caused by a sudden end to COVID-19 curbs, policy insiders and analysts said.

($1 = 6.9593 Chinese yuan)

Additional reporting by Liz Lee, Liangping Gao and Kevin Yao; Editing by Sam Holmes

Our Standards: The Thomson Reuters Trust Principles.

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Business

China’s producer prices fall, consumer inflation slows on soft demand

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  • PPI falls for a second month
  • Nov PPI -1.3% y/y vs -1.3% y/y in October
  • Nov CPI +1.6% y/y vs +2.1% y/y in October

BEIJING, Dec 9 (Reuters) – China’s factory-gate prices showed an annual fall for a second month in November while consumer inflation slowed, indicating weak activity and soft demand in an economy that has been held back by tough pandemic controls.

Analysts said they expected the government to keep interest rates low and take measures to boost confidence.

The producer price index (PPI) was down 1.3% on a year earlier, unchanged from an annual contraction seen in October, according to National Bureau of Statistics (NBS) data issued on Friday. That was slower than a 1.4% fall tipped in a Reuters poll.

The November consumer price index (CPI) rose at its slowest pace in eight months, climbing 1.6% from a year earlier, which was less than the 2.1% annual rise seen in October but in line with a Reuters poll.

“These data suggest the economic momentum (continues) to weaken,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

A high-level political meeting on Tuesday, a gathering of the ruling Communist Party’s Politburo, emphasised that in 2023 the government would focus on stabilising growth, promoting domestic demand and opening up to the outside world.

Zhang said that, although the government had eased pandemic controls over the past week, it would take further measures to spur the economy.

“The Politburo meeting … identified weak confidence as a major problem for the economy,” he said. “I expect the government will do more to boost market and household confidence. The fast pace of reopening indicates the government’s sense of urgency.”

Growth in the world’s second-largest economy has sagged this year, largely impacted by the uncompromising COVID-19 curbs as global demand has also wavered.

The producer price deflation and milder consumer price inflation of November accompanied record COVID-19 infections and related curbs that disrupted production and curbed mobility.

Although markets have cheered the shift in pandemic policy, economists say it will likely depress growth over the next few months as infections surge, bringing an economic rebound only later in 2023.

Reuters Graphics

Producer deflation was led by the steel industry, in which prices were down 18.7%.

Part of the explanation for slower growth in consumer prices was in food markets.

Food prices were up 3.7% on a year earlier, whereas the rise seen in October was 7.0%. Within the food category, pork was a factor behind moderating inflation: it was 34.4% pricier in November than in the same month last year, but in October the annual rise had been 51.8%.

Underlying core annual inflation, which excludes volatile food and energy prices, was just 0.6% in November, unchanged from October

“The overall inflation pressure remains benign in China, and we expect the CPI inflation will be around 1.6% for 2023, down from 2.0% in 2022. Given this, the monetary policy will remain accommodative over the coming year,” said Hao Zhou, chief economist at Guotai Junan Group.

China’s central bank has kept its benchmark one-year loan prime rate at 3.65% since August. It expects consumer inflation to remain moderate next year.

Reporting by Liangping Gao and Liz Lee; Editing by Edmund Klamann and Bradley Perrett

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Business

U.S. heading into shallow recession, no respite from rate hikes yet: Reuters poll

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BENGALURU, Dec 9 (Reuters) – The U.S. economy is heading into a short and shallow recession over the coming year, according to economists polled by Reuters who unanimously expected the U.S. Federal Reserve to go for a smaller 50 basis point interest rate hike on Dec. 14.

The Fed has another half-point at least to go with rates early in the new year with inflation still running well above the Fed’s 2% target even though economists put a steady 60% probability on a recession taking place in 2023.

After raising the federal funds rate 75 basis points at each of the previous four meetings, all 84 economists polled Dec. 2-8 expected the central bank to go for a slightly softer half a percentage point to 4.25%-4.50% this time.

While the central bank is attempting only to deliver some pain and not a full-fledged downturn, economists, who tend to be slow as a group in forecasting recessions, raised the probability of one in two years to 70% from 63% previously.

That suggests investors and stock markets may have gotten ahead of themselves with optimism over the past month that the world’s largest economy may skirt a recession entirely. That is already showing up in safe-haven flows to the U.S. dollar.

“Unless inflation recedes quickly, the U.S. economy still appears headed for some trouble, though possibly a little later than expected. The relative good news is that the downturn should be tempered by extra savings,” said Sal Guatieri, senior economist at BMO Capital Markets.

“But this assumes the economy’s durability doesn’t compel the Fed to slam the brakes even harder, in which case a delayed downturn might only flag a deeper one.”

Although the fed funds rate is expected to peak at 4.75%-5.00% early next year in line with interest rate futures, one-third of economists, 24 of 72, expected it to go higher.

There are already clear signs the economy is slowing, particularly in the U.S. housing market, often the first to react to tightening financial conditions, and the epicenter of the 2007-08 recession.

Existing home sales (USEHS=ECI) have fallen for nine months in a row. And house prices, already in retreat, were expected to drop 12% peak-to-trough and nearly 6% next year, a separate Reuters poll showed.

Around 60% of economists, 27 of 45, who provided quarterly gross domestic product (GDP) forecasts, predicted a contraction for two straight quarters or more at some point in 2023.

A large majority of economists, 35 of 48, said any recession would be short and shallow. Eight said long and shallow, while four said there won’t be any recession. One said short and deep.

The world’s largest economy was forecast to grow just 0.3% next year, and expand at annual rates well below its long-term average of around 2% until 2024.

Over 75% of economists, 29 of 38, who answered a separate question said the risk to their GDP forecasts was skewed to the downside.

But with inflation expected to stay above the Fed’s target at least until 2026 and the labor market remaining strong, the bigger risk was rates would peak higher and later than expected.

“With core inflation likely remaining stubbornly high, we now anticipate the current tightening process to continue through Q2 2023,” said Jan Groen, chief U.S. macro strategist at TD Securities, who expected the fed funds rate to peak at 5.25%-5.50% in May.

“There remains a risk of an even higher terminal rate given the high and sticky rates of core inflation and still strong labor market conditions,” he added.

The U.S. unemployment rate (USUNR=ECI), which so far has stayed low, was expected to climb from the current 3.7% to 4.9% by early 2024. If realized, that would still be well below the levels seen in previous recessions.

(For other stories from the Reuters global economic poll:)

Reporting by Indradip Ghosh; Polling by Sujith Pai and Swathi Nair; Editing by Ross Finley and Chizu Nomiyama

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World

China’s trade suffers worst slump in 2-1/2 yrs as COVID woes, feeble demand take toll

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  • China’s exports worst since Feb. 2020, miss forecast
  • Imports fall steepest since May 2020 on sluggish demand
  • Global economic slowdown, China’s COVID woes heap pressure
  • Politburo meet points to domestic demand key driver in 2023, analyst says

BEIJING, Dec 7 (Reuters) – China’s exports and imports shrank at their steepest pace in at least 2-1/2 years in November, as feeble global and domestic demand, COVID-led production disruptions and a property slump at home piled pressure on the world’s second-biggest economy.

The downturn was much worse than markets had forecast, and economists are predicting a further period of declining exports, underlining a sharp retreat in world trade as consumers and businesses slash spending in response to central banks’ aggressive moves to tame inflation.

Exports contracted 8.7% in November from a year earlier, a sharper fall from a 0.3% loss in October and marked the worst performance since February 2020, official data showed on Wednesday. They were well below analysts’ expectations for a 3.5% decline.

Beijing is moving to ease some of its stringent pandemic-era restrictions, but outbound shipments have been losing steam since August as surging inflation, sweeping interest rate increases across many countries and the Ukraine crisis have pushed the global economy to the brink of recession.

Exports are likely to shrink further over coming quarters, Julian Evans-Pritchard, senior China Economist at Capital Economics, said in a note.

“Outbound shipments will receive a limited boost from the easing of (China’s) virus restrictions, which are no longer a major constraint on the ability of manufacturers to meet orders,” he said.

“Of much greater consequence will be the downturn in global demand for Chinese goods due to the reversal in pandemic-era demand and the coming global recession.”

Responding to the broadening pressure on China’s economy, state media reported on Wednesday that a high-level meeting of the ruling Communist Party held on the previous day had emphasised the government’s focus in 2023 will be on stabilising growth, promoting domestic demand and opening up to the outside world.

“The Politburo meeting held yesterday points to domestic demand as the major driver for growth for the next year, and the fiscal policy will remain proactive to support demand,” said Hao Zhou, chief economist at Guotai Junan International

Reuters Graphics

‘BUMPY REOPENING’

Almost three years of pandemic controls have exacted a heavy economic toll and caused widespread frustration and fatigue in China.

The widespread COVID curbs hurt importers too. Inbound shipments were down sharply by 10.6% from a 0.7% drop in October, weaker than a forecast 6.0% decline. The downturn was the worst since May 2020, partly also reflecting a high year-earlier base for comparison.

Imports of soybeans and iron ore fell in November from a year earlier while those of crude oil and copper rose.

This resulted in a narrower trade surplus of $69.84 billion, compared with a $85.15 billion surplus in October and marked the lowest since April when Shanghai was under lockdown. Analysts had forecast a $78.1 billion surplus.

The government has responded to the weakening economic growth by rolling out a flurry of policy measures over recent months, including cutting the amount of cash that banks must hold as reserves and loosening financing curbs to rescue the property sector.

But analysts remain sceptical the steps could achieve quick results, as the full-blown relaxation of pandemic controls will take more time and as both domestic and external demand remains weak.

Many businesses are struggling to recover, while surveys last week on factory activity in China and globally suggested many more months of hard grind ahead.

Apple supplier Foxconn (2317.TW) said that revenue in November dropped 11.4% year-on-year, after production problems related to COVID controls at the world’s biggest iPhone factory in Zhengzhou.

“The shift away from zero-COVID and step up in support for the property sector will eventually drive a recovery in domestic demand but probably not until the second half of next year,” Evans-Pritchard said.

With the Chinese yuan already down sharply this year, policymakers’ room for manoeuvre is also limited as hefty monetary policy stimulus at home at a time of rapidly rising interest rates globally could trigger large scale capital outflows.

The Ukraine war, which sparked a surge in already high inflation globally, has intensified geopolitical tensions and further undermined the business outlook.

China’s economy grew just 3% in the first three quarters of this year, well below the annual target of around 5.5%. Full-year growth is widely expected by analysts to be just over 3%.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, cautioned about China’s “bumpy reopening” process.

“As global demand weakens in 2023, China will have to rely more on domestic demand,” he said.

Reporting by Ellen Zhang and Ryan Woo; Editing by Shri Navaratnam

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Business

UK economy to shrink in 2023, risks ‘lost decade’: CBI

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LONDON, Dec 5 (Reuters) – Britain’s economy is on course to shrink 0.4% next year as inflation remains high and companies put investment on hold, with gloomy implications for longer-term growth, the Confederation of Business Industry forecast on Monday.

“Britain is in stagflation – with rocketing inflation, negative growth, falling productivity and business investment. Firms see potential growth opportunities but … headwinds are causing them to pause investing in 2023,” CBI Director-General Tony Danker said.

The CBI’s forecast marks a sharp downgrade from its last forecast in June, when it predicted growth of 1.0% for 2023, and it does not expect gross domestic product (GDP) to return to its pre-COVID level until mid-2024.

Britain has been hit hard by a surge in natural gas prices following Russia’s invasion of Ukraine, as well as an incomplete labour market recovery after the COVID-19 pandemic and persistently weak investment and productivity.

Unemployment would rise to peak at 5.0% in late 2023 and early 2024, up from 3.6% currently, the CBI said.

British inflation hit a 41-year high of 11.1% in October, sharply squeezing consumer demand, and the CBI predicts it will be slow to fall, averaging 6.7% next year and 2.9% in 2024.

The CBI’s GDP forecast is less gloomy than that of the British government’s Office for Budget Responsibility – which last month forecast a 1.4% decline for 2023.

But the CBI forecast is in line with the Organisation for Economic Co-operation and Development (OECD), which expects Britain to be Europe’s weakest performing economy bar Russia next year.

The CBI forecast business investment at the end of 2024 will be 9% below its pre-pandemic level, and output per worker 2% lower.

To avoid this, the CBI called on the government to make Britain’s post-Brexit work visa system more flexible, end what it sees as an effective ban on constructing onshore wind turbines, and give greater tax incentives for investment.

“We will see a lost decade of growth if action isn’t taken. GDP is a simple multiplier of two factors: people and their productivity. But we don’t have people we need, nor the productivity,” Danker said.

Reporting by David Milliken; editing by Diane Craft

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Business

U.S. labor market shrugs off recession fears; keeps Fed on tightening path

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  • Nonfarm payrolls increase 263,000 in November
  • Unemployment rate steady at 3.7%; participation rate falls
  • Average hourly earnings rise 0.6%; up 5.1% year-on-year

WASHINGTON, Dec 2 (Reuters) – U.S. employers hired more workers than expected in November and increased wages, shrugging off mounting worries of a recession, but that will probably not stop the Federal Reserve from slowing the pace of its interest rate hikes starting this month.

Despite the strong job growth, some details of the Labor Department’s closely watched employment report on Friday were a bit weak, which economists said could be flagging upcoming labor market weakness. Household employment decreased for a second straight month. About 186,000 people left the labor force, keeping the unemployment rate unchanged at 3.7%.

Labor market tightness and strength keeps the Fed on its monetary policy tightening path at least through the first half of 2023, and could raise its policy rate to a higher level where it could stay for sometime. It also underscores the economy’s resilience heading into was is expected to be a tough year.

“November’s labor market report was clearly bad news for the Fed’s war on inflation,” said Jan Groen, chief U.S. macro strategist at TD Securities in New York. “The Fed has no other choice than to remain in tightening mode for the near future, with 50 basis points hikes in December and February.”

Nonfarm payrolls increased by 263,000 jobs last month. Data for October was revised higher to show payrolls rising 284,000 instead of 261,000 as previously reported. Monthly job growth of 100,000 is needed to keep pace with growth in the labor force.

Economists polled by Reuters had forecast payrolls increasing 200,000. Estimates ranged from 133,000 to 270,000. Employment growth has averaged 392,000 per month this year compared with 562,000 in 2021.

Hiring remains strong despite announcements of thousands of job cuts by technology companies, including Twitter, Amazon (AMZN.O) and Meta (META.O), the parent of Facebook.

Economists say these companies are right-sizing after over-hiring during the COVID-19 pandemic, noting that small firms remain desperate for workers.

There were 10.3 million job openings at the end of October, with 1.7 openings for every unemployed person, many of them in the leisure and hospitality as well as healthcare and social assistance industries.

The gains in employment last month were led by the leisure and hospitality sector, which added 88,000 jobs, most of them at restaurants and bars. Leisure and hospitality employment remains down 980,000 from its pre-pandemic level.

There were 45,000 jobs added in healthcare, while government payrolls increased 42,000. Construction employment increased by 20,000 jobs despite the housing market turmoil, while manufacturing added 14,000 jobs.

But retail trade employment fell by 30,000 jobs, with most of the losses in general merchandise stores. Transportation and warehousing payrolls decreased by 15,000 jobs. Temporary help jobs, a segment normally considered a harbinger of future hiring, decreased by 17,200.

“The labor market might encounter some bumps in the road next year, but it’s heading into 2023 cruising,” said Nick Bunker, head of economic research at the Indeed Hiring Lab.

Fed Chair Jerome Powell said on Wednesday the U.S. central bank could scale back the pace of its rate hikes “as soon as December.” The Fed has raised its policy rate by 375 basis points this year from near zero to a 3.75%-4.00% range in the fastest rate-hiking cycle since the 1980s.

Policymakers meet on Dec. 13 and 14. Attention now shifts to November’s consumer price data due on Dec. 13.

Stocks on Wall Street fell. The dollar rose against a basket of currencies. U.S. Treasury prices were lower.

WAGES ACCELERATE

With the labor market still tight, average hourly earnings increased 0.6% after advancing 0.5% in October. That raised the annual increase in wages to 5.1% from 4.9% in October. Wage growth peaked at 5.6% in March.

Reuters Graphics Reuters Graphics

The broad wage gains suggest that the moderation in inflation, evident in October data, will be gradual. Economists said this also raised concerns about a wage-price spiral that could keep service prices rising outside the shelter component. Fed officials have shied away from calling a price-wage spiral.

“The broad-based nature of the increase and its consistency with other data on wages makes us think that around 5% average hourly earnings growth is not an aberration,” said Andrew Hollenhorst, chief U.S. economist at Citigroup in New York.

Strong wage gains are helping to drive consumer spending, which surged in October, leading economists to believe that an anticipated recession next year would be short and shallow. But there are some signs of weakness emerging in the labor market.

Household employment decreased by 138,000 jobs, the second straight monthly decline. Though household employment tends to be volatile as it is drawn from a smaller sample compared to nonfarm payrolls, economists said the divergence between these two measures was important to watch.

“The household survey may be better in capturing turning points in the labor market than the payroll survey, since the payroll survey is unable to adequately capture activity in opening and closing firms while the household survey can,” said Sophia Koropeckyj, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

Others, however, argued nonfarm payrolls were a better gauge and expected household employment to converge with payrolls.

The participation rate, or the proportion of working-age Americans who have a job or are looking for one, slipped to 62.1% from 62.2% in October. Some of the decrease in household employment and participation was likely because of illness, with 1.6 million people saying they were absent from work because they were sick, up 265,000 from October.

The participation rate for Americans 55 years and older fell, possibly reflecting retirements. The employment-to-population ratio dipped to 59.9% from 60.0% in October.

Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci

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Business

Japan’s inflation hits 40-year high as BOJ sticks to easy policy

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  • Japan CPI +3.6% yr/yr vs forecast +3.5%, highest since 1982
  • Bulk of price hikes due to cost-push inflation, unsustainable
  • BOJ sees consumer inflation falling below 2% next fiscal year

TOKYO, Nov 18 (Reuters) – Japan’s core consumer inflation accelerated to a 40-year high in October, driven by currency weakness and imported cost pressures that the central bank shrugs off as it sticks to a policy of ultra-low interest rates.

The nationwide core consumer price index (CPI) was up 3.6% on a year earlier, exceeding the 3.5% rise expected by economists and the 3.0% gain seen in September.

Reuters Graphics

It was the largest jump since February 1982, when a Middle East crisis stemming from the Iran-Iraq war disrupted crude oil supply and triggered a spike in energy prices.

The rise in the index, which excludes volatile fresh food prices but includes oil products, confirmed that inflation remained above the 2% goal of the Bank of Japan (BOJ) for a seventh consecutive month.

But economists do not expect the BOJ to join a global trend of raising interest rates, because it sees this year’s acceleration in inflation as a cost-push episode that will fade as import costs stop pushing.

Foreign supply constraints have driven up prices of imported food, industrial commodities and manufacturing parts, and so has a fall in the yen, which in dollar terms is down more than 20% this year.

“I haven’t changed my view that the rise will start to slow down soon,” said Takeshi Minami, chief economist at Norinchukin Research Institute, noting declines in global grain prices. “I expect inflation to peak by year-end and the rise in prices to start diminishing in the new year.”

BOJ Governor Haruhiko Kuroda reiterated on Thursday a pledge to maintain monetary stimulus to achieve wage growth and sustainable and stable inflation. The central bank is keeping long-term interest rates around zero and short-term rates at minus 0.1%.

[1/3] A woman chooses products at a drug store in Tokyo, Japan October 21, 2022. REUTERS/Kim Kyung-Hoon/File Photo

The economy remains fragile as it recovers from the COVID-19 downturn. Also, Japan’s inflation rate remains moderate by the standards of other developed countries.

BEER, SAKE UP

Kuroda has argued that global commodity costs account for half of the magnitude of Japan’s price rises.

The October data showed raw-material price rises and the yen’s weakness had driven a 15.2% increase in energy costs, while food excluding perishables was up by 5.9%, the fastest rise since March 1981.

Among food items, 88% were more costly than a year before, led by alcoholic drinks, such as beer and sake.

Prices of household durable goods were up 11.8%, their biggest rise since March 1975, driven by costs of transportation, raw materials and energy and by the weak currency.

The data suggests Japanese firms may be shaking off their deflationary mindset as they apply price rises to a broadening range of products. Of the 522 items composing the core consumer price index, 406 were more expensive in October than a year earlier. In September, 385 were.

The BOJ has forecast average prices for the fiscal year to March 2023 will be 3% higher than in 2021-22 but that the rise for 2023-24 will be only half as great, because commodity and other cost-push factors will have subsided.

In a sign subcontractors are struggling with wholesale price pressures, the corporate goods price index jumped 9.1% in the year to October.

Reporting by Tetsushi Kajimoto; Additional reporting by Chang-Ran Kim; Editing by Sam Holmes and Bradley Perrett

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Business

UK economy shrinks at start of feared long recession

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  • GDP in Q3 -0.2% q/q vs Reuters poll -0.5%
  • Sept economic output -0.6% m/m vs poll -0.4%
  • GDP in July and August revised up
  • Economists still see UK going into recession
  • Finance minister predicts “tough road ahead”

LONDON, Nov 11 (Reuters) – Britain’s economy shrank in the three months to September at the start of what is likely to be a lengthy recession, underscoring the challenge for finance minister Jeremy Hunt as he prepares to raise taxes and cut spending next week.

Economic output shrank by 0.2% in the third quarter, less than the 0.5% contraction analysts had forecast in a Reuters poll, Friday’s official data showed.

But it was the first fall in gross domestic product since the start of 2021, when Britain was still under tight coronavirus restrictions, as households and businesses struggle with a severe cost-of-living crisis.

Britain’s economy is now further below its pre-pandemic size – it is the only Group of Seven economy yet to recover fully from the COVID slump – and is smaller than it was three years ago on a calendar-quarter basis.

The Resolution Foundation think tank said that although the fall was smaller than investors had feared, it left Britain on course for its fastest return to recession since the mid-1970s.

Its research director James Smith said the figures provided a sobering backdrop for Hunt’s Nov. 17 budget announcement, when he will try to convince investors that Britain can fix its public finances – and its credibility on economic policy – after Liz Truss’s brief spell as prime minister.

“The Chancellor will need to strike a balance between putting the public finances on a sustainable footing, without making the cost-of-living crisis even worse, or hitting already stretched public services,” Smith said.

Responding to the data, Hunt repeated his warnings that tough decisions on tax and spending would be needed.

“I am under no illusion that there is a tough road ahead – one which will require extremely difficult decisions to restore confidence and economic stability,” Hunt said in a statement.

People walk across Millennium Bridge with the City of London financial district seen behind, amid the coronavirus disease (COVID-19) pandemic, in London, Britain, January 20, 2021. REUTERS/Hannah McKay

“But to achieve long-term, sustainable growth, we need to grip inflation, balance the books and get debt falling,” he added. “There is no other way.”

RECESSION REALITY

The Bank of England said last week that Britain’s economy was set to go into a recession that would last two years if interest rates were to rise as much as investors had been pricing.

Even without further rate hikes, the economy would shrink in five of the six quarters until the end of 2023, it said.

“Fears of a recession are turning into reality,” Suren Thiru, economics director for the Institute of Chartered Accountants in England and Wales, said.

“This fall in output is the start of a punishing period as higher inflation, energy bills and interest rates clobber incomes, pushing us into a technical recession from the end of this year.”

In September alone, when the funeral of Queen Elizabeth was marked with a one-off public holiday that shut many businesses, Britain’s economy shrank by 0.6%, the Office for National Statistics said. That was a bigger monthly fall than a median forecast for a 0.4% contraction in the Reuters poll and the largest since January 2021, when there was a COVID-19 lockdown.

But gross domestic product data for August was revised to show a marginal 0.1% contraction compared with an original reading of a 0.3% shrinkage, and GDP in July was now seen as having grown by 0.3%, up from a previous estimate of 0.1%.

The upward revisions to July and August’s GDP data mostly reflected new, quarterly figures on health and education output, alongside some stronger readings from the professional and scientific and wholesale and retail sectors, the ONS said.

Reporting by William Schomberg and David Milliken; Editing by Kate Holton and Catherine Evans

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Business

U.S. job growth seen smallest in nearly two years in October, unemployment rate up

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  • Nonfarm payrolls forecast increasing 200,000
  • Unemployment rate seen rising to 3.6% from 3.5%
  • Average hourly earnings expected to gain 0.3%

WASHINGTON, Nov 4 (Reuters) – U.S. employers likely hired the fewest workers in nearly two years in October and increased wages at a moderate pace, suggesting some loosening in labor market conditions, which would allow the Federal Reserve to shift towards smaller interest rates increases starting in December.

The Labor Department’s closely watched employment report on Friday is also expected to show unemployment ticking up to 3.6% from 3.5% in September. The Fed on Wednesday delivered another 75-basis-point interest rate hike and said its fight against inflation would require borrowing costs to rise further.

But the central bank signaled it may be nearing an inflection point in what has become the fastest tightening of monetary policy in 40 years.

“The labor market is basically OK, but it does seem to be slowing,” said Guy Berger, principal economist at LinkedIn

in San Francisco. “The Fed is going to try to thread the needle where they slow down the labor market enough to put downward pressure on wages and inflation, without causing a recession.”

Nonfarm payrolls likely increased by 200,000 jobs last month after rising 263,000 in September, according to a Reuters survey of economists. That would be the smallest gain since December 2020, when payrolls declined under an onslaught of COVID-19 infections. Estimates ranged from 120,000 to 300,000.

Employment gains were probably almost evenly distributed among industry sectors, in line with recent patterns, with the leisure and hospitality industry leading the way. Leisure and hospitality employment remains below its pre-pandemic level by at least a million jobs. Interest rate-sensitive industries like financial activities as well as transportation and warehousing probably shed jobs as they did in September. Government payrolls are seen declining further.

Hurricane Ian is expected to have put a small dent in payrolls. The storm slammed into Florida in late September and boosted unemployment claims in mid-October, when the government surveyed businesses for last month’s employment report.

“Hurricane Ian should have at least some downward impact on nonfarm payrolls,” said Lou Crandall, chief economist at Wrightson ICAP in Jersey City. “We have lowered our forecast slightly to show an increase of 150,000 (from 200,000) on the assumption that at least some workers were sidelined in the areas hit hardest by the hurricane.”

BACKFILLING POSITIONS

Job growth has remained solid even as domestic demand has softened amid higher borrowing costs because of companies replacing workers who would have left. But with recession risks mounting, this practice could end soon. A survey from the Institute for Supply Management on Thursday found some service industry companies “are holding off on backfilling open positions,” because of uncertain economic conditions.

Still, the labor market remains tight, with 1.9 job openings per unemployed person at the end of September.

Average hourly earnings are forecast to have increased 0.3%, matching September’s gain. But there is a risk of an upside surprise because of Hurricane Ian as well as a calendar quirk. According to Wrightson ICAP’s Crandall, storms and other events that keep people away from work during the payrolls survey week can artificially raise the reported level of hourly earnings.

The government surveys businesses and households during the during the week that includes the 12th day of the month.

“The payroll survey week included the 15th of the month, which tends to bias the month/month change higher, since wage increases secured by those workers paid at mid-month and month-end rather than bi-weekly are more likely to have been captured,” said Kevin Cummins, chief U.S. economist at NatWest Markets in Stamford, Connecticut.

Stripping out any distortions from the weather and calendar quirk, wage growth is cooling. Average hourly earnings are forecast to have increased 4.7% year-on-year in October after rising 5.0% in September. Other wage measures have also come off the boil, which bodes well for inflation.

“We believe we’ve seen wage growth peak,” said Michelle Green, principal economist at Prevedere in Columbus, Ohio. “So while we will continue to see year-over-year growth in average hourly earnings across all private sector employees, the velocity of that growth really is starting to slow down.”

Reporting by Lucia Mutikani; Editing by Cynthia Osterman

Our Standards: The Thomson Reuters Trust Principles.

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Business

Europe’s debt market strains force some governments to rework trading rules

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Oct 31 (Reuters) – Some euro zone countries have eased rules for the banks that manage the trading of their government debt to help them cope with some of the most challenging market conditions in years, officials told Reuters.

Out of 11 major euro area debt agencies Reuters contacted, officials in the Netherlands and Belgium told Reuters they have loosened various market-making obligations dictating how actively these banks should trade their debt.

France, Spain and Finland said their rules are already structured to automatically take account of market tensions. Germany and Austria said they do not set such rules.

As the European Central Bank unwinds years of buying the region’s debt, while the war in Ukraine, an energy shock and turmoil in Britain are making investors wary of loading up on government bonds, debt managers are adjusting to a less liquid, more volatile market.

That in turn, could raise borrowing costs for governments, already squeezed by climbing interest rates and energy-related spending, and bring more uncertainty for institutions, such as pension funds, which seek in government debt safety and stability.

Euro zone government debt bid-ask spreads, the difference between what buyers are offering and sellers are willing to accept and a measure of how smooth the trading is, have risen up to four-fold since the summer of 2021, data compiled by MarketAxess (MKTX.O) for Reuters showed. The data tracked German, Italian, French, Spanish and Dutch bonds, markets which account for the vast majority of euro zone debt with nearly 8 trillion euros outstanding.

Bond bid-ask spreads soar

LOOSENED OBLIGATIONS

Wider spreads mean more volatility and higher transaction costs. So governments expect, and some formally require their primary dealers – banks that buy government debt at auctions and then sell to investors and manage its trading – to keep those tight.

In markets with formal requirements, they also face other “quoting obligations” to ensure the best possible liquidity. Those obligations have been loosened in some countries to account for heightened market stress.

Jaap Teerhuis, head of dealing room at the Dutch State Treasury, said several of its quoting obligations, including bid-ask spreads, had been loosened.

“Volatility is still significantly higher compared to before the (Ukraine) war and also ECB uncertainty has also led to more volatility and more volatility makes it harder for primary dealers to comply,” he said.

Liquidity has been declining since late 2021 as traders started anticipating ECB rate hikes, Teerhuis said. The Netherlands then loosened its quoting obligations following the invasion of Ukraine.

Belgium’s quoting obligations also move with changes in trading conditions. But it has relaxed since March the rules on how many times per month dealers are allowed to fail to comply with them and has also reduced how much dealers are required to quote on trading platforms, its debt agency chief Maric Post said.

The two countries also loosened rules during the COVID-19 pandemic. Belgium’s Post said that lasted only four months in 2020, but it has kept obligations looser for much longer this time.

Finland said it has not changed its rules, but could not rule out acting if conditions persist or worsen.

Outside the bloc, Norway has also allowed dealers to set wider bid-ask spreads.

In Italy, debt management chief Davide Iacovoni said on Tuesday it was considering adjusting the way it ranks primary dealers each year to encourage them to quote tight spreads. Such rankings can affect which banks get to take part in lucrative syndicated debt sales.

Debt offices where obligations adapt automatically said attempts to enforce pre-determined bid-ask spreads in volatile markets would discourage primary dealers from providing liquidity and cause more volatility.

“If the market is too volatile, if it’s too risky, if it’s too costly, it’s better to adjust the bid-offer to what is the reality of the market than to force liquidity,” France’s debt chief Cyril Rousseau told an event on Tuesday.

Britain’s September sell-off highlighted how liquidity can evaporate fast in markets that are already volatile when a shock hits. In that case, the government’s big spending plans triggered large moves in debt prices, forcing pension funds to resort to fire sales of assets to meet collateral calls.

‘FRAGMENTED MARKET’

Allianz senior economist Patrick Krizan said with bond volatility nearing 2008 levels, a fragmented market for safe assets was a concern.

The euro zone is roughly 60% the size of the U.S. economy but it relies on Germany’s 1.6 trillion euro bond market as a safe haven – a fraction of the $23-trillion U.S. Treasury market.

In the case of a volatility shock “you can very easily fall into a situation where some markets are really drying up,” Krizan said. “For us it’s one of the biggest risks for the euro area.”

For example, the Netherlands like Germany has a top, triple A rating. But like other smaller euro zone markets it does not offer futures, a key hedging instrument, and so far this year the premium it pays over German debt has doubled to around 30 basis points.

Smaller governments pay premium over bigger rating peers

Efforts by debt officials are welcomed by European primary dealers, whose numbers have dwindled in recent years because of shrinking profit margins and tougher regulation.

Two officials at primary dealer banks said that fulfilling the quoting obligations in current conditions would force them to take on more risk.

“If (issuers) want private sector market-making, it needs to be profitable, or why would anyone do it? And it can’t be if rates move around 10-15 basis points a day,” one said of moves of a scale that had rarely been seen in these markets in recent years.

($1 = 0.9970 euros)

Reporting by Yoruk Bahceli and Dhara Ranasinghe; additional reporting by Belen Carreno in MADRID, Lefteris Papadimas in ATHENS and Padraic Halpin in DUBLIN; editing by Tomasz Janowski

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